Downgrade and decline
Weekly Bond Commentary
Markets were a bit unsettled last week on the Fitch rating downgrade of the U.S. government, from AAA to AA+, and the U.S. Treasury announcement that it would issue more securities than had been expected and would likely issue still more in the future.
Economic data points are indicating a slowing expansion of activity. Banks continue to tighten credit standards even as they see less demand for commercial and industrial, residential real estate and home equity loans. Broadly speaking, current standards are on the tighter end of the range for all loan categories. This quarterly bank survey speaks to both supply and demand for credit, which is the lifeblood of the economy; continuing contraction points to gradual slowing of economic growth.
In keeping with this gradual decline, the ISM Manufacturing Index rose less than forecast, as the prices-paid index rose modestly but the employment component weakened. The U.S. manufacturing sector shrank again, but the slight increase indicates a marginally decreasing rate of contraction.
The labor market continues to be solid. The economy had 9.58 million job openings at the end of June, little changed from the end of May. That equates to 1.61 vacancies per unemployed job seeker. Weekly jobless claims rose slightly, from 221,000 to 227,000, and the ADP private employer survey of how many hires they made during July cooled from 455,000 to 324,000. But the key labor market release was the July employment report, which showed the U.S. added 187,000 jobs. That is in line with the June release, which was revised from 209,000 to 185,000. The unemployment rate actually dipped, from 3.6% to 3.5%, and average hourly earnings held steady at a 4.4% gain over the last year, rather than easing lower as markets had forecast.